Abstract
This paper replaces increasing product variety with quality upgrading in the Romer model [Romer, Paul M., Journal of Political Economy 98 (1990), S71–S102]. We show that the range of parameters for which a steady state exists can be divided into two subspaces with well-behaved comparative statics and saddle-point dynamics in one subspace, but with “perverse” comparative-statics properties and either equilibrium indeterminacy or instability in the other subspace. These results for the closed economy can also be used to characterize the dynamics of the M-country open-economy version of the model.
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